7th May 2020 - U.S. private payrolls dive by a record 20.2 million

Good morning

OVERNIGHT DATA AND HEADLINES

U.S. private employers laid off a record 20.236 million workers in April as mandatory business closures in response to the novel coronavirus outbreak savaged the economy, setting up the overall labor market for historic job losses last month. The plunge in private payrolls shown in the ADP National Employment Report on Wednesday suggested that national lockdowns to slow the spread of COVID-19 could leave lasting scars on the economy, even as large parts of the country reopen non-essential businesses. Data for March was revised to show private payrolls decreasing by 149,000 jobs instead of the previously reported 27,000, which was the first decline since September 2017. Economists polled by Reuters had forecast private payrolls tumbling by 20.050 million jobs in April. The ADP report is jointly developed with Moody's Analytics. The ADP report was published ahead of the government's more comprehensive employment report for April scheduled for release on Friday. While it has a poor record predicting the private payrolls component of the government's employment report because of methodology differences, economists said it offered some clues on the size of anticipated job losses in April. The ADP noted that its April report "does not reflect the full impact of COVID-19 on the overall employment situation.”

According to a Reuters survey of economists, nonfarm payrolls are forecast to have tumbled by a historic 21.853 million in April, which would blow away the record 800,000 dive seen during the Great Recession. Employment dropped by 701,000 jobs in March, ending a record streak of gains dating to September 2010. The unemployment rate is seen jumping to 16% in April, which would shatter the post-World War Two record of 10.8% touched in November 1982. In March the jobless rate shot up 0.9 percentage point, the largest monthly change since January 1975, to 4.4%.

U.S. President Donald Trump said on Wednesday he would be able to report in about a week or two on whether China is fulfilling its obligations under a Phase-1 trade deal the two countries signed in January. Speaking at a White House event, Trump told reporters China may or may not keep the trade deal.

Retail sales in the euro zone suffered their largest decline on record in March. Sales in the 19 countries sharing the euro zone fell by 11.2% in March from February and by 9.2% year-on-year. The declines were sharper than market expectations of 10.5% and 8.0% respectively, according to a Reuters poll of economists. The month-on-month decline was the steepest in Eurostat data going back to 1999. The year-on-year figure, which has not been negative since the end of 2013, was the worst on record in data reaching back to 2000. It was also twice as large a decline as in February 2009, the worst month of the 2008-2009 financial crisis.

The euro zone economy will contract by a record 7.7% this year because of the COVID-19 pandemic, inflation will almost disappear and public debt and budget deficits will balloon, the European Commission forecast on Wednesday. As the economy contracts this year, consumer prices will almost stagnate, the Commission forecast. The inflation rate will slow to 0.2% in 2020, before accelerating to 1.1% next year, when the euro zone is to return to growth of 6.3%. Investment will plunge 13.3% this year, it said. With government spending the main fuel for the economy, the effort to keep economies alive will widen budget gaps in the euro zone to an aggregate 8.5% of GDP this year from 0.6% last year, before the deficit shrinks again to 3.5% in 2021. A surge in public debt will take longer to undo. The Commission forecast euro zone debt will jump to 102.7% of GDP this year from 86% last year, and recede only to 98.8% in 2021.

Britain's construction sector suffered by far its biggest contraction since the launch of widely followed survey of the industry 23 years ago as the coronavirus lockdown shuttered building sites and suppliers. The construction PMI slumped to 8.2 in April from 39.3 in March. The previous low was 27.8, recorded during the depths of the financial crisis in 2009. A Reuters poll of economists had pointed to a much less severe fall, to 22.0.

The S&P 500 and the Dow fell after U.S. President Donald Trump cast doubt on a trade deal with China and data showed U.S. private employers laid off 20 million workers in April, underscoring the economic fallout of the coronavirus outbreak. Dow Jones fell 218.45 points, or 0.91%, to 23,664.64, the S&P 500 lost 20.02 points, or 0.70%, to 2,848.42 and the Nasdaq added 45.27 points, or 0.51%, to 8,854.39.

CURRENCIES

The safe-haven JPY and USD rose as investors sought refuge in these currencies in the wake of dire global economic numbers.

Longer-dated U.S. Treasury yields jumped to three-week highs and the yield curve steepened after the Treasury Department sharply increased the size of its long-dated debt auctions to help finance its rapidly expanding deficit. Treasury said it will launch a long-planned 20-year bond and increase securities auction sizes across a range of maturities to raise cash to meet record government borrowing needs caused by measures to fight the coronavirus outbreak and mitigate economic damage. The government said it would sell $20 billion in 20-year bonds. Next week it will sell $42 billion in three-year notes, $32 billion in 10-year notes, and $22 billion in 30-year bonds.

Benchmark 10-year note yields jumped 6 basis points on the day to 0.714%, after earlier reaching 0.743%, the highest since April 15.

Thirty-year bond yields rose 9 basis points to 1.420%, after getting as high as 1.446%, the highest since March 26.

The yield curve between two-year and 10-year notes steepened to 53 basis points, from 47 basis points on Tuesday.

Germany launched its first syndicated bond sale in half a decade, as the government increases spending to support the country's economy through the coronavirus crisis. Germany raised 7.5 billion euros ($8.1 billion) via the 15-year syndicated bond deal. It was the first time the country sold a conventional bond via a syndication demonstrating the lengths issuers are having to take to fund stimulus programmes to fight the economic hit from the coronavirus pandemic. 10-year Bund yields had their worst day in a month, rising 7 bps to -0.51%. Italian 10-year bond yields rose 10 bps to 1.97%, their highest in two weeks.

COMMODITIES

Gold fell more than 1%, pressured by a stronger USD and expectations that gold supplies will grow as refineries resume operations. Spot gold dipped 1.1% to $1,686.50 per ounce.

Dalian iron ore futures ended higher, supported by ramping up of production by steelmakers amid robust construction activity and hopes for further Chinese demand. Weekly capacity utilisation rates at blast furnaces in 247 mills across China rose to 81.68% as of April 30, data from Mysteel consultancy showed. Prices of spot iron ore with 62% iron content for delivery to China rose to $84.5 per tonne.

Copper prices rose for a third day and zinc hit a seven-week peak. Benchmark 3 month LME copper was up 0.9% to $5,203.50 a tonne, its highest since April 30.

Oil dropped 4% to below $30 a barrel as U.S. crude stockpiles ticked up and diesel inventories swelled, offsetting OPEC-led cuts in production. Brent settled down $1.25, or 4%, at $29.72 a barrel, the first loss after six consecutive sessions of gains. West Texas Intermediate (WTI) crude fell 57 cents a barrel to $23.99.

US - Initial jobless claims (last 3.839m). Rate of job loss moderating but still at a substantial level.

US - March consumer credit - jumped in Feb and another increase is expected.

AUD THOUGHTS AND TECHNICAL ANALYSIS

AUD fell overnight as the broader USD index rose above 100 and U.S. stocks closed in the red. AUD high 0.6453 selling lower towards 0.6397 into the NY close.

Today’s Economic data will focus on the Australian March trade balance release with forecasts looking for an increase towards $6.4bn. Australia's trade surplus printed at $4.4bn in February, down from $4.95bn at the end of 2019.Exports fell 4.7% in February, with reduced international travel driving a near 10% fall in services (-$0.85bn) and Cyclone Damien leading to an 8% ($0.8bn) drop in metal ores. Imports were also disrupted in February, down 4.3% ($1.5bn). China's lock-down in February had a major impact on trade. Goods exports have rebounded, as reported in preliminary customs data (not seasonally adjusted), boosted by the recovery of iron ore post Cyclone Damien. On the services side, COVID disruptions will continue. Goods imports also rebounded with China re-opening, as suggested by the preliminary customs data.

In China we have many scheduled releases which should be seen around 12pm onwards AEST. Focus will concentrate on a narrowing in the trade balance figures.

Markets are looking for a moderation in U.S. initial jobless claims for the week ended 2 May. A number over 1 million is still likely, which while still large is a vast improvement on the 3.8m seen last week. The Bank of England is unlikely to change any policy settings, which are already ultra-loose. For the AUD, opens heavier this morning just under 0.6400 at 0.6397. The correlation to risk assets eroding a bit as JPY buying trumps commodities and equities. AUD longs could be losing confidence as it trades back below the 10-DMA (0.6457) and threatens to break below the 21-DMA (0.6401). AUD now on track to target next support and last lows at 0.6373. An improvement in risk sentiment and JPY selling would give AUD longs confidence to drive a rally. Tests of resistance in the 0.6570/75 and 0.6670/0.6700 zones would then be possible.